Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production: Sale price per unit $ 44 Variable costs per unit: Manufacturing $ 24 Marketing and administrative $ 9 Total fixed costs: Manufacturing $ 79 comma 000 Marketing and administrative $ 21 comma 000 If a special sales order is accepted for 2 comma 700 widgets at a price of $ 32 per unit, fixed costs increase by $ 8 comma 000, and variable marketing and administrative costs for that order are $ 2 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

The acceptance of the special offer will increase income, therefore, it should be accepted.

Explanation:

Giving the following information:

Variable costs per unit:

Manufacturing= 24

The special sales order is for 2,700 widgets for $ 32 per unit.

The fixed costs will increase by $8,000

Variable marketing and administrative costs for that order are $ 2 per unit.

Because it is a special offer and there is unused capacity, we will not take into account the previous fixed costs, only the incremental.

First, we need to calculate the unitary contribution margin:

Contribution margin= selling price - unitary variable cost

CM= 32 - 24 - 2= $6

Now, we can calculate the effect on income and whether it is convenient to accept the special offer.

Effect on income= 2,700*6 - 8,000= $8,200

The acceptance of the special offer will increase income, therefore, it should be accepted.

The new order will have a positive effect on the operating income by increasing it by $8,200.

Explanation:

The effect of the new order on the operating income can be calculated as follows:

Sales revenue from new order = 2,700 × $32 = $86,400

Increase in fixed cost = $8,000

Note that the original total fixed cost has been used in the original production of 75,000 widgets. Therefore, it will not affect the new order and it will not be considered.

Variable manufacturing cost = 2,700 × 24 = $64,800

Note that the same variable manufacturing cost per unit used for the original production is also used for the new order. The reason it does not change and now new information is given on it.

Variable marketing and administrative costs = 2,700 × $2 = $5,400

New order operating income = New order sales revenue – All the costs of the new order

New order operating income = $86,400 - $8,000 - $64,800 - $5,400 = $8,200

Therefore, the new order will have a positive effect on the operating income by increasing it by $8,200.

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